The Web: The effect of illegal downloading

A weekly series examining the global telecommunications phenomenon known as the World Wide Web.

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CHICAGO, Feb. 18 (UPI) -- A 12-year-old boy illegally downloads pop music from the song-swapping site, Morpheus.com. His friend down the block in his leafy, upscale suburb also is online, sharing copies of the latest Christina Aguilliera tune he found on the peer-to-peer portal, Kazaa.com.

"Ask any 12-year-old and they probably would not think that what they just did was wrong," said Brian Caplan, an entertainment lawyer with the New York City law firm of Goodkind, Labaton, Rudoff & Fucharow, LLP. "You have a climate in the middle schools where illegal downloading becomes a way of life, and you have a psychology where you have the youth thinking that they are entitled to this music, for free, from the Internet."

This mindset last week helped lead to an event that is sending reverberations throughout the music industry -- one that finally might force record companies to revamp the way they market and embrace downloading as a viable technology for music sales.

Tower Records Inc. last week filed for Chapter 11 bankruptcy protection in federal court in Wilmington, Del., citing the dramatic impact that illegal downloading has had on its bottom line.

"Our issues are financial, not operational," E. Allen Rodriguez, chief executive officer of the 44-year-old record store chain, said in a statement.

Until the bankruptcy filing, the music industry had dealt with declining sales for the past few years -- because of illegal downloading technology proliferation -- by suing the leading alleged offenders.

The Recording Industry Association of America in Washington, D.C., last month filed 532 lawsuits in federal courts in New York City and Washington hoping to deter others from illegally sharing online copyrighted songs by artists.

"Controlling distribution on the Internet is now central to success in the music business," Eric Briggs, a principal with the music industry consultancy The Salter Group in Los Angeles, told United Press International. "There are strategic changes that the industry must make in order to survive."

Once known for innovative marketing and embracing new ideas, record companies through the past few years, as music downloading on peer-to-peer networks evolved, have acted as "dinosaurs," Caplan said.

They were stuck in a business model, which developed during the 1960s when the Beatles began selling smash hit albums of a number of songs, after the debut of "Sergeant Peppers Lonely Hearts Club Band," said Caplan.

Record executives did not want to yield the profits that came from selling albums at $15 to $20 per CD -- and paying the recording artists 9 cents per sale.

"They thought it would bastardize their business by promoting the single over the album," said Caplan.

Record companies did not want to embrace the way they did business in the 1950s -- selling singles of artists like Elvis or Chuck Berry.

"Four years ago, at industry conferences, executives were debating whether 99 cents per song was a fair price," Caplan added. "But there was a lack of foresight. Life didn't stand still."

The failure to respond to the online downloading phenomenon has meant music sales have declined by close to 45 percent during the past few years, said Owen Sloane, an entertainment law attorney at the Los Angeles firm of Berger Kahn, who has represented Elton John and Lindsey Buckingham and Stevie Nicks of Fleetwood Mac.

A vicious cycle has emerged where record companies' revenues have declined, forcing them to cut back on the development of new artists.

"Now there's a problem with the quality of the product they are offering," Sloane said.

The debut in recent months of Apple Computer's iPod service -- where consumers pay for songs legally -- has given the industry the idea it can ride the wave of the Internet and make sales with new audiences, Briggs said.

"Buy.com is adopting it, this kind of downloading technology," he said. "Microsoft and Sony will come out with their plays in this space shortly. This is harkening back to the early Internet days. It's a fascinating business model. Within the next year or so, we will start to see some emerging winners here.

"We don't know if it will be Apple or the major music companies. But once the smoke clears, all the major music companies will be selling online," Briggs said.

He also predicted singles will sell for as little as 39 cents per download.

Record stores like Tower will survive -- but not by targeting youth, Briggs noted. They will target older consumers, ages 35 and up, with in-store CD sales and offerings of a rich variety of recordings of popular artists, like the Eagles and the Rolling Stones.

"In the future, there will be a market for physical CDs," Sloane said. "Retail will have to adapt and become more user friendly, like Barnes and Noble. They will have to let their customers listen to the music, but as part of a social experience."

Still, some technology developers are concerned the illegal downloading phenomenon may continue.

One company, PentaWare Inc., located in Hampton, N.H., told UPI it no longer is offering MP3 software with its digital file compression product out of concern over the widespread, illegal swapping of songs online with that kind of technology.

"We're just being realistic," CEO Claude Ostfeld said in a telephone interview from his office in Milan, Italy.

Experts, however, have concluded that if the music producers in New York, Hollywood and Nashville had moved more quickly they would not have allowed a culture that tolerates lawlessness online -- the taking of songs without paying for the product -- to have emerged.

"People tended to minimize it. Lots of excuses for doing it were voiced," Sloane said. "But the primary problem is once you tolerate petty unlawful conduct, you are condoning lawlessness. There's a tipping point. It becomes like people jumping over turnstiles to get on the subway."

One rationalization used by illegal downloaders is that all artists are wealthy so what would missing the revenue from a few songs be to them, he said.

"That's a Robin Hood attitude," said Sloane, who represents the estate of the late musician Frank Zappa. "But a lot of the people living off of these copyrighted works are not rich. They are widows and orphans. They are small businesses."

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